home equity

Borrow against home while in retirement?

Don TaylorDear Retirement Adviser,
Our home is paid off with a value of more than $400,000. We are in our mid-70s and would like to use some of the equity to increase our income and giving. Our only debt is a credit card, which we pay off each month. Should I consider refinancing at these low rates?

Thanks,
-- Jack Juncture

Dear Jack,
Retired seniors are, unfortunately, having problems qualifying for conventional mortgages. Today's loan underwriting model focuses on income and credit history. With your credit card payment history, I'd expect that your credit score is good. At the same time, you need a retirement income stream to get the loan approved.

I'm particularly uncomfortable with the idea that you'd like to borrow against the equity in your home to increase your giving. Financially speaking, that's a bad idea, regardless of whether it's for charitable giving or a gifting program for family members. While generosity is wonderful, you can't anticipate your future financial needs as a couple. Borrowing money to give to others reduces your financial flexibility and could cause you potential difficulty.

I can understand wanting to tap your home's equity to free up funds for spending. With conventional financing, you'd get a big lump sum upfront and then have to pay the interest expense on the entire lump sum. Sure, you can invest what you don't need, but it's still a drag on the budget because you're unlikely to earn more than you must pay in interest.

A home equity line of credit lets you borrow less upfront and to draw against a line of credit as needed. These kinds of adjustable-rate loans are interest-only in the early years but have higher interest rates than conventional loans. As I write this, Bankrate's national average for a 15-year fixed-rate mortgage is 3.21 percent, versus 5.12 percent for a home equity line of credit.

A home equity conversion mortgage may be a better, viable option. While closing costs can be expensive, you get a lower fixed-rate than the home equity line of credit. You also get the option of borrowing only what you need, avoiding a monthly loan payment.

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